The Benefit of Leasing
Leasing conserves capital
We live in a world where demands on working capital always seem to exceed supply. By providing 100% financing, leasing allows your customer to have more money available to put into profit-generating activities.
Leasing provides tax-timing advantages
Lease payments are normally treated as a fully deductible operating expense for tax purposes. In addition, since the lease term is often shorter than the depreciable life for tax purposes, a lease can enable your customer to expense the equipment more rapidly than a purchase.
Leasing provides an alternate source of credit
Leasing provides your customers with an additional source of financing. Unlike most bank loans, which require 20% to 30% down, leasing offers, financing for 100% of the equipment cost. Furthermore, leasing does not impact a customer’s bank line of credit – the existing line remains intact for essential short-term needs.
Leasing means equipment flexibility
As their businesses grow and change, customers may need more equipment or equipment with increased capabilities or additional accessories. Leasing allows customers to add to or trade up their equipment at any point during the lease term.
Leasing lessens the impact of inflation
Inflation is a fact of life; every year the purchasing power of the dollar declines in value. By leasing, customers get the equipment they need at today’s prices and pay for it with tomorrow’s cheaper dollars.
Lease payments are fixed payments
Since lease payments are fixed, leasing lets your customer plan ahead with the assurance that his monthly payments will not change. With revolving bank loans, payments can change depending upon credit strength and / or prevailing interest rates.
Lower cost
Leasing conserves capital. Monthly lease payments are less than monthly purchase payments or monthly depreciation plus interest expense.
Convenience
Leasing provides on-the-spot, one-stop financing for a total solution. Hardware, software, maintenance and asset management can be included in the lease.
Protection against obsolescence
The lease can be structured to include upgrades and partial or complete equipment swaps either at mid-term or at lease-end.
Eliminates risk
The equipment can be returned at the end of the lease without regard for its book value or the expense of proper disposal.
Provides for off balance sheet financing
This potentially increases your borrowing capacity while easing the budgeting process and preserving key financial ratios.
Disadvantages
Cost consideration:
Interest rate is higher than it would be for a purchase loan. Delinquent charge increases the cost of lease.
Ownership flexibility:
In opting for a lease, the lessee may sometimes invite restrictions on equipment use, insurance covenants, etc.
Ineligibility of certain incentives:
Certain grants and incentives are available to owners of assets who themselves use the assets. By setting up a lease arrangement, such benefits are sometimes lost by both the lessor and the lessee.
Taxation:
In a case where the lessee has adequate tax capacity to utilize the tax benefit, long-term leases may sometimes prove inefficient.
Under statement of assets:
Leasing leads to an effective under statement of a lessee’s assets and leads to an under valuation of the firm.
